Tax Dodging Is a Monopoly Tactic: How Our Tax Code Undermines Small Business and Fuels Corporate Concentration
March 30, 2023
By Stacy Mitchell, Susan Holmberg, Institute for Local Self-Reliance
When our tax system is built to foster fairness and justice in addition to vitality and economic growth, it can help to restructure economic power and more broadly distribute and boost prosperity.
Introduction
There has been much excavation of the antitrust policy choices that have led to the corporate concentration we are seeing today. But there is less analysis of how other neoliberal policy moves have fueled our monopoly problem. This is especially true of our tax system, which local and federal policymakers have systematically structured in a way that deepens the concentration of corporate power. Meanwhile, smaller competitors bear their fair share of their tax burden, even as they are being crushed by outsized corporations. Making our tax system fairer would help small businesses—which are essential for robust economies, community well-being, and healthy democracies—compete on a more level playing field.
We open this brief by examining the significance of corporate tax advantages in the emergence of one of the country’s most powerful monopolies: Amazon. The second section delves into examples of our biased tax code, which was created as part of the larger sweep of neoliberal, pro-corporate policies that began in the late 1970s. The third section details what we lose when small businesses are crushed by policies that favor monopoly dominance. The final section explores small business politics in the US and lays out examples of an antimonopoly tax agenda that is fair to small businesses and helps build broad prosperity.
Amazon’s Dominance Was Built on Tax Dodging
When Jeff Bezos launched Amazon in 1995, he made securing government favors a core part of his strategy (Mitchell and LaVecchia 2017). Chief among these favors was lucrative tax advantages largely unavailable to his competitors, especially small independent businesses. This disparate tax treatment gave Amazon a pivotal early edge over rivals in the online market. Ever since, it has continued to finance Amazon’s dominance, supplying billions of dollars in free cash flow that the tech giant has used to fund predatory pricing (systematically selling key goods and services below cost to monopolize markets) and acquisitions designed to thwart competition.
Amazon has proven to be one of the defter exploiters of our tax code, and Jeff Bezos is, arguably, the first CEO to devise a market domination strategy built explicitly on tax dodging. For these reasons, Amazon provides a particularly clear example of the confluence of tax policy and monopoly power. As such, tracing its path to dominance through the tax system offers a road map for understanding how harmful tax policies have fueled our monopoly problem.
The opening salvo for Bezos’s tax strategy was locating Amazon’s first headquarters in Washington, instead of California, to avoid sales tax in a populous state. As he explained in 1996, “It had to be in a small state. In the mail-order business, you must charge sales tax to customers who live in any state where you have a business presence . . . We thought about the Bay Area, which is the single best source for technical talent. But it didn’t pass the small-state test” (Taylor 1996).
We cannot overstate how much this sales tax advantage drove Amazon’s growth during its first two decades while precluding the growth of competitors in the e-commerce market. In that early period, most of Amazon’s likely online competitors were brick-and-mortar retailers. But no matter how aggressively they pursued e-commerce, these retailers were hamstrung by having to collect sales tax (typically 5 to 10 percent) from their online customers, while, in most cases, Amazon did not. This was due to a 1992 United States Supreme Court ruling that blocked states from imposing sales tax collection on retailers that lacked “nexus,” or a physical presence, in the state. Independent booksellers, later joined by the big chains, campaigned vigorously for Congress to level the playing field, but Amazon’s lobbyists defeated their efforts time and again.
In 2018, the Supreme Court finally reversed course and granted states the authority to require online retailers to collect sales tax. Writing for the majority in what became known as the Wayfair case, Justice Anthony Kennedy acknowledged that the Court’s prior position had harmed competition by giving “some online retailers an arbitrary advantage” (South Dakota v. Wayfair, Inc., et al.). By then, however, the damage was done: Amazon had long since tightened its grip on e-commerce. The ruling simply meant that no potential rival would be given a similar leg up.
It would be hard to overstate how much this decades-long sales tax advantage mattered to Amazon’s success.
We’re accustomed to telling the story of Amazon in terms of genius and innovation, but Bezos, who started his career on Wall Street, succeeded in no small part by leveraging the tax system to distort the playing field.
It was nearly 20 years into this scheme before researchers began to measure its success. Relying on credit card data and differences in when states extended sales tax to Amazon (because it had opened an in-state office or warehouse), a group of economists concluded in 2014 that Amazon’s ability to avoid tax collection drove a significant share of its sales, particularly for high-priced items, which the authors defined as $250 and above (Baugh, Ben-David, and Park 2018).
But the more telling evidence can be found in the extraordinary measures Amazon took to preserve this tax advantage. A Wall Street Journal investigation in 2011 showed, for example, that Amazon instructed employees to carry business cards of an Amazon subsidiary—rather than Amazon.com—so they could not be tied to Amazon’s retail operations, ensuring their presence in a state would not trigger nexus (Woo 2011). Amazon even concealed from state tax officials that it was operating a warehouse in Texas, until reporting by the Dallas Morning News exposed it. In 2010, the state demanded $269 million in back taxes, but Amazon threatened to shut down the facility, which would have wiped out hundreds of jobs. The state canceled the tax bill (Copelin 2012). Elsewhere, Amazon enticed and bullied state officials to create special exemptions. In South Carolina, Amazon made a deal with the governor to remain sales-tax-free despite building warehouses in the state. When the state legislature protested, Amazon halted construction until lawmakers backed down (Cope 2014).
As Amazon’s logistics growth accelerated, it began building more warehouses in more places, which made it harder to sidestep sales tax. In 2012, six years before the Supreme Court closed the sales tax loophole, Amazon’s top brass had already pivoted to a new strategy for getting the public to finance the company’s growth: development subsidies. Amazon hired a team with expertise in extracting tax breaks and incentives from local officials eager to host warehouses with their promise of job creation. According to Good Jobs First, prior to 2012, Amazon had not garnered more than three subsidy deals in the US per year. But since 2012, it has secured an average of 19 per year. As of July 2022, Amazon has been awarded at least $4.8 billion in local subsidies to help fund its expansion—and undercut competitors (Good Jobs First 2022).
Those public dollars have helped Amazon build a package delivery operation that now rivals the US Postal Service in scale. In the last five years alone, Amazon added over 275 million square feet of warehousing and shipping facilities in North America (mainly in the US), more than tripling its logistics footprint. Much of this is thanks to our taxpayer dollars. By nurturing Amazon’s growth with these subsidies, policymakers have helped the tech giant crush smaller businesses that have been paying their fair share only to see their tax dollars used to fund their biggest competitor.
Amazon has also skirted corporate income taxes in the US and in Europe by establishing a labyrinth of shell companies, which transfer profits to subsidiaries based in countries like Luxembourg, a lucrative tax haven. In 2021, Amazon’s European operations generated 51 billion euros in sales, but paid no European income taxes (Berthelot 2022). The European Commission has challenged Luxembourg’s tax arrangements with Amazon as a form of “illegal state aid” that violates competition policy by favoring one company over others. However, the Commission has yet to make an effective case to the courts (Neuman 2021). Meanwhile, in the US, Amazon paid just 6 percent in federal corporate income tax on $35 billion in reported profits, meaning it avoided paying over $5 billion into federal coffers, according to the Institute on Taxation and Economic Policy (Gardner 2022).
These tax policies have netted Amazon billions of dollars, giving it a major advantage over smaller businesses that shoulder their full tax obligations. Such policies have also provided a crucial source of funding for Amazon’s predatory pricing schemes, enabling the corporation to sell below cost to capsize competitors and lock in online shoppers. More recently, Amazon has used its prodigious cash flow to acquire other companies, taking over pivotal technologies to cement its dominance of cloud computing, while buying its way into new industries with a string of acquisitions in groceries, health care, entertainment, and more. Special tax privileges have thus played a pivotal role in making Amazon one of the most powerful, and therefore dangerous, monopolies in US history (Mitchell 2018). (See Stacy Mitchell’s 2018 piece in The Nation, “Amazon Doesn’t Just Want to Dominate the Market—It Wants to Become the Market.”)
Amazon is far from the only tax-fueled incumbent. Most of the giant corporations that now dominate their industries—from Comcast to Waste Management Inc. to Tyson Foods—owe their market power in part to government handouts and tax favors. For decades, local and federal policymakers have systematically structured the tax system to fuel the concentration of corporate power, at the expense of small businesses, workers, communities, and the economy as a whole.
Key Takeaways
#1
At the local and federal level, our tax system is systematically structured to preference monopolies and deepen the concentration of corporate power. Undoing this and making our tax system fairer would help correct concentration by leveling the playing field for small businesses, who are cornerstone to a robust economy, community well-being, and a healthy democracy.
#2
Decades of deregulation fueled by neoliberal ideology built a tax system on the belief that bigger is better. So when these policies began to devastate local communities, it was thought that subsidies to large-scale corporations would bring relief. Instead, corporations like Amazon pocketed billions of dollars in local subsidies to fund their expansion and undermine local businesses, all while failing to increase employment.
#3
Amazon is a prime example of exploiting the tax code in order to build a monopoly, like the choice to base its first headquarters in Washington to skirt regulations and avoid two decades worth of sales tax, unlike the local brick and mortar stores who paid their fair share of taxes. While monopolists like Walmart leverage their scale, employing teams of lawyers to minimize property taxes, decimating local communities by draining funds from schools, libraries, and local programs and services.
#4
Small independent businesses disadvantaged by a tax code that preferences corporations, still often outperform large-scale businesses in important ways. From the distribution of federal relief loans to independent businesses during the pandemic by small banks, to independent pharmacies in North Dakota and West Virginia who lead the nation in COVID-19 vaccine distribution. Small businesses disaggregate economic power, nurture democracy and empower community self-determination, much the opposite of monopolies, who disproportionately harm Black and Brown communities.
#5
During President Franklin D. Roosevelt’s administration, the Democratic Party fought for the rights of small businesses and workers, helping secure much of the New Deal agenda. Democrats should tap into the rich history of progressivism to build an anti-monopoly tax system that centers small businesses, closes loopholes, redistributes tax obligations, and curtails corporate power.
This issue brief is part of Roosevelt's new Taxing Monopolies series, which explores how today’s tax policies strengthen dominant, incumbent corporations at the cost of workers and small businesses, and how a rethinking and rewriting of the tax code can work to curb the excessive economic and political power of large corporations and their owners.